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Interview: Nicholas McGrath Executive Director and Chief Executive Officer AIMS AMP Capital Industrial REIT Management Limited

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AIMS AMP Capital Industrial REIT (AAREIT) was originally listed as Macarthur Cook Industrial REIT in 2007. The trust’s former sponsor, Macarthur Cook Limited, was acquired by the AIMS Financial Group in July 2009 which resulted in the latter being the new sponsor of the trust. The trust’s principal investment objective is owning and investing in a diversified portfolio of income-producing industrial real estate assets in Singapore and Asia including warehouse and logistics centres, manufacturing facilities, business parks, and hi-tech spaces.

It presently has 25 properties valued at S$914.5 million as at 31 March 2012. More recently, the trust announced it is redeveloping 20 Gul Way that is expected to quadruple its annual rental income and triple its gross floor area on that property when fully completed in December 2013.

Nicholas McGrath, Executive Director and CEO of the manager of AAREIT, shared with Biz Daily the group’s strategy of raising the overall quality of the trust’s portfolio, as well as its plan to increase the trust’s profile in the market.


Describe to us the selection criteria in choosing the property you purchase. How do you make sure the acquisitions are yield-accretive?

Location and connectivity are critically important when we’re examining potential acquisitions. Connectivity means how accessible the property is to major roads and transport networks. For example, a logistics company needs to store and transport goods efficiently and if they have a ramp-up warehouse close to major roads and ports, that’s a key attraction.  What’s important to our tenants is important to us. Our assets are located close to Singapore’s essential port and airport infrastructure.

We also look for well-maintained properties, with well established quality tenants who are either multinationals or listed Singapore companies. We conduct financial due diligence on each tenant to ensure their credit worthiness and physical due diligence on the property so that we are aware of any potential capital expenditure for the building in the short to medium term.  We’re also attracted to properties that are under-utilised, which offer opportunities to unlock value within the property. For example, bringing rents up to market rates or by developing the plot ratio to make full use of the floor space, such as our 20 Gul Way development.


Your property portfolio is divided into warehousing, manufacturing and property in development. So what’s the main focus of the REIT?

The Trust’s properties are well-diversified across a spread of industrial trade sectors (ramp-up warehouses, warehouse and logistics, business park/hi-tech space and manufacturing) and our tenants are diversified across a range of industries. Sixty four percent of our assets are in warehousing and logistics, with a bias towards high quality ramp-up warehouses. Our assets are strategically located close to Singapore’s essential port and airport infrastructure.

We have deliberately decreased our exposure to the manufacturing sector as Singapore is no longer a competitive place for low value production goods. This is in line with Jurong Town Corporation’s (industrial landlord) direction of moving industrial space up the value chain. For example, by creating industrial space suitable for the biotechnology sector, which is in line with the Government’s strategy of transforming Singapore into a knowledge-based economy and creating a “global talent hub”.


We understand that your strategy this year is to raise the overall quality of your portfolio. How do you plan to implement this? Will this involve selling some of the “poor quality” assets?

We are certainly focused on unlocking value from within the existing portfolio. With industrial property prices rising since late 2010 it is increasingly difficult to acquire yield-accretive property at this point in the cycle. With the strength in the industrial market, we are pursuing a strategy of recycling capital by selling selective smaller properties in the portfolio that are likely to underperform over the longer term. The capital released allows the Trust to reinvest in our existing portfolio by way of asset enhancement or redevelopment to improve the quality of existing assets and deliver better return for our unitholders.

Earlier this calendar year, we completed the sale of 31 Admiralty Road for a sale price 8.9 per cent above book value and 22.7 per cent above the REIT’s initial purchase price.  From that sale, we recycled capital by investing in the 20 Gul Way development to increase the gross floor area from 378,064 sq ft to 1,159,536 sq ft. Once completed in 2013, the 20 Gul Way development’s yield on cost is approximately 8.1 per cent and is expected to lift Distributions per Unit (DPU) by around 15 per cent (1.465 S-cents per unit).


On the other hand, how will the strategy affect acquisitions?

In the short term, we are focused on unlocking the value of existing assets within the portfolio to grow DPU. However, we may consider acquisitions and/or expanding into other geographies provided our investment criteria can be met. Our investment criteria is to ensure:

– Gearing remains within the 30 – 40 per cent  range

– Assets are yield-accretive

– Sponsors (AMP Capital and AIMS Financial Group) have a presence in new geographies, enabling AA REIT to tap their expertise.


We note that trade and other payable have surged year-on-year to S$27.5 million in FY2012. What is the reason for the surge?

The increase in Trade and other payables is largely due to a progress payment payable in respect of the 20 Gul Way development. We have contracted Indeco Engineers Pte Ltd (subsidiary of CWT Limited) to design and construct a best-in-class ramp up warehouse at 20 Gul Way and Singapore logistics provider CWT Limited has signed a tenancy contract to lease 100 per cent of the warehouse once it is complete. Levels one and five are leased for five years and two months, and levels two, three and four are leased for four years and two months.


What is the net gearing that the REIT is comfortable with? Will the recent investment grade credit rating from S&P help you in this regard?

While the Trust’s target gearing range is 30 to 40 per cent, as at 31 March we have maintained gearing at around 30 per cent for ten consecutive quarters.

In April 2012, Standard & Poor’s assigned the Trust the investment grade BBB- credit assessment, reflecting the Trust’s stable cash flows from well located and good quality industrial assets. It also reflects our proven track record of prudent and consistent capital management.

The investment grade rating from Standard & Poor’s will also give the Trust the opportunity to potentially access the debt capital markets in addition to traditional banking markets, thus broadening and further diversifying the Trust’s funding sources

It’s worth noting that AA REIT’s gearing is 30 per cent, which is lower compared to the S-REIT weighted average of 34 per cent and the Industrial REIT weighted average of 35 per cent.


Any plans to increase your profile in the SGX? We noticed that despite having one of the highest yields in local REIT universe, your shares are thinly traded.

AA REIT’s solid performance is attracting investor attention. Between January 1 and June 25 this year, AA REIT’s unit price was up 27 per cent, compared to the FTSE REIT Index which was up 13.8 per cent, according to Bloomberg data.

According to an analysis of Bloomberg data by Standard Chartered, AA REIT is yielding 8.5 per cent, compared to the weighted average of 6.7 per cent for S-REITs, and 7.3 per cent for Industrial REITs.  AA REIT’s gearing is 30 per cent, compared to the S-REIT weighted average of 34 per cent and the Industrial REIT weighted average of 35 per cent.

The Manager is actively seeking to build investor awareness about AA REIT, its performance and investment proposition. We participate in investor seminars, real estate conferences, and we conduct investor roadshows following each quarterly result.


How far do you think the eurozone crisis and China’s slowdown will affect the REIT industry and your business in particular?

Market uncertainties stemming from the crisis in the eurozone continue to dampen the global economy and business sentiment. The outlook is slightly more positive for the Singapore warehouse sector due to sustained demand from third party logistics players arising from Singapore’s strategic position as a major regional trading hub coupled with the industrial property demand and supply imbalance. In addition, resilient domestic demand in emerging Asia may provide some support to global demand. However, demand in Asia is unlikely to be able to fully mitigate the effects of an economic slowdown in the advanced economies. If the global economy continues to worsen, Singapore’s economic growth could be affected and may impact the Singapore industrial property market.

We are confident that AA REIT would withstand any Singapore downturn that may result from the issues in the European Union. AA REIT has no foreign currency exposure, and is fully funded in Singapore dollars, with no debt due for renewal until October 2013.  The Trust, rated investment grade by Standard and Poor’s, has a solid and diversified capital structure. We have been prudently managing capital, with leverage maintained at around 30 per cent for ten consecutive quarters as at 31 March. The Trust is also delivering stable cashflows and unitholder distributions from the defensive industrial sector and is very well positioned to continue its strong performance.


Singapore is projected to have a marginal GDP growth of 1-3 per cent for this year, and electronics is expected to drag on growth. How would this affect your business considering that you serve the industrial sector in Singapore?

Despite Singapore’s forecast economic growth slowing to 1.0 to 3.0 per cent for 2012, industrial prices and rental rates for the first quarter of 2012 rose by 7.2 per cent and 1.3 per cent respectively for multiple-user factory space.  Similarly, rents rose 8.8 per cent and 1.9 per cent respectively for multiple-user warehouse. As at 31 March, the Trust had 99.2 per cent occupancy compared to URA’s 94 per cent industrial average, released on 27 April 2012. The Trust’s high quality assets are strategically located in service hubs supporting Singapore’s ports infrastructure, and market demand and tight supply of quality industrial space is underpinning portfolio performance.


Overall, what does the REIT foresee as its main challenge down the road?

For the short term, external environmental factors such as a euro-led slowdown may adversely impact the business of our tenants and affect their ability to ensure continuous rental payment to the REIT. As such, our team of asset managers are actively engaging with our tenants to keep abreast of their business developments. However we are confident that AA REIT would withstand any Singapore downturn that may result from the issues in the European Union. We have been prudently managing capital, with leverage maintained at around 30 per cent for ten consecutive quarters as at 31 March. The Trust is also delivering stable cashflows and unitholder distributions from the defensive industrial sector and is very well positioned to continue its strong performance.

For the medium to long term, Singapore is afterall a small place for the REIT to grow and the REIT may look to investment opportunities in other geographies for growth. The REIT will continue to allocate resources to analyse investment opportunities and structures in potential markets for the REIT where the Sponsors have a presence and real estate capability.


Any other business developments in the pipeline?

We’re committed to unlocking the value of the portfolio for the benefit of our unitholders. We’re very pleased with the progress of the S$155 million development of 20 Gul Way, which is on time and on budget.  Upon completion in 2013, 20 Gul Way is expected to increase DPU by as much 15 per cent  (1.465 S-cents per unit).

As much as 50 per cent of our portfolio has under-utilised plot ratio, representing significant enhancement and/or development potential. If we have any new development plans, we will make market announcements at the appropriate time.